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TMI Blog1935 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... this point. That article runs as follows : "The amount for the time being remaining undischarged of moneys borrowed or raised by the directors for the purposes of the company (otherwise than by the issue of share capital) shall not at any time exceed the issued share capital of the company without the sanction of the company in general meeting." The question for consideration is what is the proper construction of this article. It is contended on behalf of Sassoons that the words "for the time being" mean "when the claim is made." It is contended that whatever be the initial borrowing by the directors that is not a matter to be inquired into by the Court. I do not think the terms of the article justify such a narrow construction. The article in terms fixes the limit at any time and although the validity of the claim may have to be considered in respect of the amount claimed on the date of liquidation I am unable to consider that the article in terms refers only to that point of time and no other. On behalf of the claimants it is contended that the article authorizes the directors to borrow money and the company as such has unlimited power of borrowing. Therefore, when the directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "My impression is.............that the resolution set forth in the replication goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the company, be authorized to be borrowed: and the replication shows a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special non est factum, does not raise any objection to this advance as against the company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncil held that it was very clearly beyond the authority of the directors to borrow, upon the credit of the company, and sum exceeding one-half of the actually paid up capital of the company. There is no doubt that the authority of the directors, limited as it was by the article, was capable of being extended under the provisions of Article 31. But by that article one-half of the votes of the shareholders given at a general meeting called for the purpose was necessary. It was not contended that the authority of the directors to borrow was ever extended at a general meeting of the share-holders held for the purpose and therefore the lender was not entitled to presume that the directors had any authority to borrow beyond the prescribed limits. In the course of the judgment their Lordships considered the applicability of Royal British Bank v. Turquand and observed as follows: "The case of Royal British Bank v. Turquand was decided with reference to a company registered under 7 and 8 Viet., C. 110, and Jervis, C. J., remarked that the lender, finding that the authority might have been made complete by a resolution would have had a right to infer the fact of a resolution authorizing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money and if money in fact is borrowed, no claim can be maintained by the lender against the company on the footing either of debt or of money had and received. In that case, Viscount Haldane, L.C., while considering an unauthorized borrowing by a company which was a statutory society and had no power to borrow, observed as follows: "If it be outside the power of a statutory society to enter into the relation of debtor and creditor in a particular transaction, the only possible remedy for the person who has paid the money would, on principle, appear to be one in rent and not in personam, a claim to follow and recover specifically any money which could be earmarked as never having ceased to be his property. To hold that a remedy will lie in personam against a statutory society, which by hypothesis cannot in the case in question have become a debtor or entered into a contract for repayment, is to strike at the root of the doctrine of ultra vires as established in the jurisprudence of this country. That doctrine belongs to substantive law and is the outcome of statute, and cannot be made different by any choice of form in procedure.'' The Lord Chancellor, after examining in detail h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of facts alone. I am further supported in this view by the decision in Troup's case, where it was held that when the directors of a company have no power to borrow, a person lending money to the company cannot enforce payment of it against the company unless it had been bona fide applied to the purposes of the company. In that case the directors having no borrowing powers, being pressed for money by their contractor, obtained for him, on credit, GBP2,000 at a banker's upon their guarantee. The contractor afterwards agreed to abandon the plant, etc., to the company, on receiving GBP600 and being indemnified against the banker's claim. Subsequently to this, the secretary of the company, with the sanction of the directors, borrowed GBP500 in his own name for the company, which was applied in paying the bankers and a judgment debt of the company. The company had the benefit of the plant, etc. It was held that the secretary could recover the amount from the company with interest. The principle of that case was accepted and followed in Hoare's Case. There a sum of money had been borrowed from the lender by H, the secretary of a company, and for which three of its directors had become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole amount to the credit of the plaintiffs. The defendants paid the bonus of GBP 600 into Court, and denied liability as to the residue. It is apparent on the facts that the directors and parties were not authorized to do the acts for the company and the same were not therefore binding on the company. It was, however, held that the plaintiffs were entitled to the re-payment of GBP 1,500 actually paid by them to the defendants but to no more. This case, in my opinion, is a clear authority for the proposition that money actually received by the company and used for its business can be recovered by the claimants. In Halsbury's Laws of England (Edn. 2,) Vol. 5, at p. 314, this case is relied upon for the following proposition: "Apart from ratification, the company will be answerable for any property which has come into its possession through the unauthorized acts of the directors." It is argued on behalf of the liquidator that Irvine v. Union Bank of Australia decides to the contrary. On a closer examination of the judgment in that case, however, I am unable to agree with this contention. There, on December 23, 1867, the directors of the O.R. Company obtained from the bank a lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the defendant, to a charge on the property beyond the amount of one half of GBP17,100 the paid-up capital of the company." The form of the order finally made also makes this clear. It was as allows "Their Lordships will, therefore, further advise Her Majesty that it be ordered that the costs of the suit in the lower Court, both of the plaintiffs and of the defendant respectively, as taxed by the lower Court, be paid to the said parties respectively out of the proceeds of the sale of the property which are now in Court, and that out of the balance of such proceeds there be paid to the plaintiffs a sum of rupees equivalent, at the rate of exchange current between Rangoon and England at the time of filing of the suit, to the principal sum of GBP8,550, with interest thereon, at the rate of 8 per cent, from October 5, 1872 to the date of the sale of the property, together with a proportionate part of the accumulations, if any, of the proceeds of the sale and that the residue of the proceeds and of the accumulations thereon, if any, be paid to the defendant appellant." The O.R. Company, who were parties to the original suit had not appeared before the Privy Council at all. The questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting of the share-holders, and interest was regularly paid, with the consent of share-holders, until the winding up of the company, a period of 2 years. It was held that though the debentures were clearly improperly issued, yet as the money had been raised and applied for the benefit of the company, and the share-holders had acquiesced for two years, it was too late to dispute their validity. The report shows that the holders of the debentures themselves were present at the meeting of the shareholders, which passed the resolution, and were therefore, conscious of the irregularity of the meeting. It is" urged that this case distinctly supports the contention of M.T. Ltd., because the balance-sheets showed the amount from time to time due by the company to M.T. Ltd., and also showed the amounts from time to time paid by way of interest to M.T. Ltd. in respect of these borrowings. It is pointed out that at no time before the liquidation any shareholder had contended that the borrowings were not binding on the company. On behalf of the liquidator reliance is placed on the decision in Houghton & Co. v. Nothard, Lowe and Wills where it was held that although a person who contracts with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the fact that the share-holders were aware that the directors had been exceeding their legal powers was emphasized. In In re Railway and General Light Improvement Co., Matzetti's Case the question again came to be considered. In that case a certain item of expenditure was included in a larger item in the balance-sheet and that balance-sheet was passed by the share-holders at their meeting. The item included was shown to be unauthorized expenditure. Brett, L.J., in considering the question of ratification observed as follows: "But it cannot be said that the company ratified the payment by passing it unquestioned on the balance-sheet, unless it appeared there in such a way as to attract the attention of persons of ordinary care. There must have been direct notice, or notice sufficient to put a person of ordinary care upon inquiry as to the item. The mere statements on the balance-sheet in this case would not have put such a person upon inquiry so as to lead him to the facts. Therefore, I think there is no evidence of ratification." In In re Republic of Bolivia Exploration Syndicate, Ltd. the question of waiver in respect of an ultra vires payment, by receiving and adopting the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This contention is based on the argument that in considering the account of borrowings and repayments the rule in Clayton's case does not apply. In this connection reliance is placed on the decisions in Blackburn and District Benefit Building Society v. Cunliffe, Brooks & Co. Cunliffe Brooks & Co. v. Blackburn and District Benefit Building Society, Blackburn and District Benefit Building Society v. Cunliffe Brooks & Co. and Sinclair v. Brougham. Having regard to the view I have taken, it is not necessary to decide this. As, however, an elaborate argument was addressed to me, I think I should shortly express my opinion on the point. I do not think the liquidator's contention in this connection is correct. The first three authorities relied upon by the liquidator do not help him. In those cases an attempt was made by the claimant to show that the money advanced had been applied towards the payment of debts and liabilities of the society properly payable by it and it was held that in making the inquiry as to what amount had been properly applied in paying the debts of the company the claimant could not rely on the rule in Clayton's case. In my opinion when out of the total sum advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liquidator that no further call on the shareholders should be made. That contention is based on Sinclair v. Brougham. I do not think that case stands in the way of M.T. Ltd. The principles there discussed were for finding how the assets which were the outcome of a wholly ultra vires business were to be divided between the creditors of the ultra vires business and the share-holders of the same ultra vires business. In the present case, M.T. Ltd., claim a sum of money payable from the company in liquidation, and if the claim is allowed, all the liabilities of the shareholders to satisfy the claim of a person who is entitled to the payment of a specified sum of money must follow. I shall consider next the claim of Sassoons. It is contended on behalf of the liquidator that the agreement of February 28, 1928, is not valid and binding on the company because it is a suretyship transaction. It is pointed out that in the deed itself the company is called surety. It is common ground that at the time of the execution of the deed no money was paid and the company had borrowed no money from Sassoons. It is further pointed out that in spite of the deed, and all the recitals contained therein, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n pursuance of the contract. It further recited that G had received GBP19,578 from the company in part-payment and that a large sum still remained due to him from the company under the contract; that G was possessed of machinery and that he was indebted to the bankers for money advanced for the purposes of the contract; that the company was indebted to the bankers in GBPl,272 and that G had applied to the bankers to make him further advances to enable him to carry out the work which the bankers had agreed to do on having the re-payment of the sum of GBP14,289, the balance which was due by G to the bankers, and GBP1,272 which was due by the company to the bankers, and any other sum advanced by them to G secured as mentioned in the deed. By the indenture, G and the company covenanted to pay to the bankers GBP14,239 and GBP1,272 with all further sums advanced to G with interest and G assigned to the bankers all moneys due or to become due under the contract and all engines, etc., and the company assigned to the bankers all tin, copper, etc., to be raised out of the mines. In a suit by the bankers to enforce the mortgage, the trial Court refused to recognise the validity of the mortga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .........particularly described in the first and second schedules hereunder written, and whereas the mortgagee hath already paid ' to the mortgagor the said sum of Rs. 9,00,000 (nine lacs) as the mortgagor doth hereby admit and acknowledge out of which the mortgagor hath paid to the surety a sum of over Rs. 4,50,000 (four lacs and fifty thousand) as the surety doth hereby admit and acknowledge.........And whereas the surety also hath deposited with the mortgagee the title-deeds of the said lands...............belonging to it and whereas the mortgagee hath called upon the mortgagor and the surety to execute these presents evidencing the said deposit of title deeds as such security now this indenture witnesseth that in consideration of the amount lent and advanced to it by the mortgagor out of the said sum of Rs. 9,00,000 (nine lacs) lent and advanced to the mortgagor by the mortgagee (the receipt of which the surety and the mortgagor do hereby respectively admit and acknowledge) the surety hath already deposited with the mortgagee the title-deeds mentioned in the schedule hereunder written relating to lands belonging to the surety to the intent that the said lands may be equitably c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity; (7) that in consideration of the amount lent and advanced M.T. Ltd., had already deposited the title-deeds of their property by way of equitable mortgage for the repayment to Sassoons of the sum of Rs. 4,50,000 out of the said sum of Rs. 9,00,000; (8) that by the document M.T. Ltd., and the company did jointly and severally agree to repay to Sassoons on October 31,1931, the said sum of Rs. 4,50,000 with interest; and (9) that the company agreed to execute at its own costs, when called upon, a proper legal mortgage in favour of Sassoons of the said lands and building to secure the said sum of Rs. 4,50,000, acknowledged to be received by the company out of the said Rs. 9,00,000. In order to decide whether the transaction is ultra vires the company or not, it is necessary to have regard to these facts read along with clause 3 (f) of the memorandum of association of the company. Under that clause the company could give a promissory note to M.T. Ltd., for the amount borrowed by the company from M.T. Ltd., It is similarly permissible for M. T. Ltd., to ask the company to join them in passing a promissory note to borrow money, and for the company to join accordingly. Therefore, a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by them and which they were liable to make good to M.T. Ltd. when called upon. The difference between the position of a surety and a joint debtor is made clear and recognized so far back as 1866 in Buck v. Hurst and Bailey. In that case the plaintiff lent money to A upon B's promise to become surety for its repayment, and after the money was advanced A and B signed and delivered to the plaintiff the following memorandum: "We jointly and severally owe you GBP60 ." It was held that this was evidence for the jury of "an account stated by A and B jointly." In Guild & Co. v. Conrad, the defendant orally promised the plaintiff that if he (the plaintiff) would accept certain bills for a firm in which the defendant's son was a partner, he (the defendant) would provide the plaintiff with funds to meet the bills. It was held that this was not a contract of guarantee but a case where the defendant promised to be liable on the ground of indemnity. In other words the liability of the defendant did not arise in the event of the firm failing to pay the bills, but, apart from that consideration, the defendant had promised to discharge the bills if the plaintiff for the time being accommo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for which Sassoons received a security, the transaction appears to be within the competence of the directors and is binding on the company. The borrowing in excess by the directors from M.T. Ltd. does not touch the validity of the deed of mortgage or the rights of Sassoons thereunder, because if the security is treated as given for Rs. 4,50,000, out of Rs 9,00,000 it does not follow that the security is given for the unauthorized portion of the borrowing. This is on the ground that when a man has the power to do the right thing and does a thing which is capable of being taken either as the right thing or in excess of his power to do this right thing, it should be presumed the he had done the right thing, especially when the rights of third parties would be adversely affected on the other construction. In my opinion equity demands that it should be held that the security so given was given in respect of the borrowing which the directors were empowered to borrow under Article. 73. In respect of the excess, the claim of the claimants must stand or fall on, its own merits. The balance-sheets of the company do not show the name of Sassoons as secured or unsecured creditors. Nor is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum of Rs. 9,00,000 under the circumstances mentioned in the deed. It is next contended that the resolution of the directors authorizing the execution of the document is bad, and in this connection reliance is placed on Article 77 of Table A and Section 91-B, Companies Act. It is pointed out that Mr. A. J. Raymond was a party to the resolution and was the managing director of Sassoons and had the full powers of the board of directors. It is further pointed out that Sassoons is a private limited company and all the directors of M.T. Ltd. were parties, to this resolution. It is argued that the deed of mortgage is a tripartite agreement in which all the three companies and directors were interested and therefore there was no independent person to vote at the meeting of the directors held on February, 1928. Under these circumstances it is contended that the whole voting is bad and the resolution is void. It is pointed out that the interest of a person as a share-holder is sufficient to disqualify him for the voting under Section 91-B, and that the transaction is of such a nature that the Court should very minutely scrutinise the voting at the meeting. The contention that Sassoons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, it is not necessary that the arrangement or contract between M.T. Ltd, and the company must be contained in the same document. It is further contended against the liquidator that the interest mentioned in Article 77 and Section 91-B, Companies Act, is some personal interest which is not in common with the other share holders. For that purpose reliance is placed on the decision in Seligman v. Prince 6- Co., and the remarks at p. 629 where it is pointed out that the interest should be one not in common with the others. Reliance is also placed on behalf of the claimants on the terms of Section 91-B. In my opinion there is considerable force in the contentions urged on behalf of the claimants. I do not think, however, that it is necessary to go into this part of the argument. It is common ground that a resolution at a meeting of the board of directors of the company was passed and the execution of the deed was sanctioned. The correspondence further shows that Sassoons were informed of the board meeting having been held. Under the circumstances the contention urged on behalf of the liquidator is a contention in respect of the internal management of the affairs of the company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their own concern, is a thing known to them and known to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the articles of association or by the deed." It is, therefore, not permissible in a case like this to inquire whether there was a proper quorum for holding a meeting or whether the meeting of the directors authorizing the execution of the deed of mortgage was properly convened. These are matters of the internal management of the company, and under the principles contained in Royal British Bank v. Tarquand the company is bound by the resolution, so far as outsiders are concerned. No irregularity in the internal management would therefore vitiate the transaction so far as an outsider creditor is concerned. In this transaction there appears to be no such irregularity as it was the duty of Mr. Raymond to convey to Sassoons and there is nothing by which Sassoons could be held to be aware of any irregularity. In my opinion, therefore, this contention of the liquidator must fail. On these grounds, the deed of February 28, 1928, when executed, was valid, and Sassoons have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... menced to press M.T.s for security for the debt. M.T.s had an immovable property known as the Collins Building, which was a part of the building in which Pratts carried on business and Pratts had two immovable properties; and the correspondence shows that Sassoons wanted to get a mortgage upon all those properties both of M.T.s and Pratts, as security for the money due to Sassoons. Originally it was proposed that there should be two documents-one between M.T.s and Pratts and the other between M.T.s and Sassoons' but, in order to avoid expense it was arranged to have one. Accordingly, on February 23, 1928, resolutions were passed by the boards, both of Pratts and of M.T.s., for execution by the respective companies of a security deed in favour of Sassoons, and on February 28, 1928 the security deed in question was executed. That document, which is Exhibit J, was made between M.T.s (thereinafter called the mortgagor of the first part), Pratts (thereinafter called the surety of the second part) and Sassoons (thereinafter called the mortgage of the third part). It recites the title to the properties which were to be mortgaged, and then it recites that Pratts required money for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the actual result brought about by this document could have been brought about in that way by two documents and no question could have been raised. To hold that an arrangement which could have been carried out by two documents cannot be carried out by one document to which all the parties interested are parties, would be to sacrifice substance to form. I think that the case of Seligman v. Prince & Co. is an authority for that proposition. I agree with Mr. Coltman that that case is not on all fours with the present case. It would be on all fours if Pratts had agreed to indemnity M.T.s against their debt to Sassoons, but it seems to me that that distinction is not an essential one. The essence of this case is that as between the three parties to the deed Pratts were primarily liable to pay and Sassoons were ultimately entitled to receive the money; and that was the position also in Seligman v. Prince & Co. It is quite true that in the document there is no consideration expressed in favour of Pratts. The transaction is, I think, of the nature of a novation, that is to say a substitution of the liability of Pratts to Sassoons for the liability of Pratts to M.T.s and M.T.s to Sass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his. There were always a certain number of directors common to Pratts and M.T.s and from 1922 until 1931, that is to say, during the whole of the material period, the boards of the two companies were common. There were in all seven directors of the two companies. One of those directors was Mr. A. J. Raymond, and another Capt. E. V. Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more than a director. He was the Managing Director of Sassoons, and, under a power in their articles Sassoons had delegated to him all the powers of the directors. The resolution to that effect is Exhibit 9. Now it is alleged that in 1928, when this mortgage was arranged and executed, all the directors of Pratts were concerned or interested in the matter individually, that is to say, apart from their position as directors of Pratts, because they were directors of M.T.s and also shareholders in that company. The qualification for directors of M.T.s was the holding of one hundred shares, so that all the directors of Pratts were not only directors but also shareholders in M.T.s; and I think that the argument that they were individually concerned or interested in this mortgage is sound. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts power properly. That is the rule recognized in Royal British Bank v. Tarquand and a great many other cases. It is generally expressed by saying that outside parties are not concerned with the internal management of the company. They are not, for instance, concerned to see that there was proper quorum of directors present, or that persons who were apparently directors of the company had in fact been validly appointed. Those are matters of internal management: and I have no doubt if the disability of a director to vote upon a contract in which he was personally interested were imposed by the articles of association, the question whether he was personally interested in, and entitled to vote upon, a particular contract would be regarded as a matter of internal management, with which persons dealing with the company would not be concerned. It is argued, however, that that position does not apply in India, because the restriction against voting is a statutory disability, and non-compliance with a public statute can never be a matter of internal management. At first sight there is, I think, force in that contention; but on consideration, I agree with the argument of Mr. Munshi, that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpressed an opinion against that view. I therefore do not rely on Section 87. Apart from this the first point argued in favour of the view that Sassoons had notice of the common directorship is that they had such notice through Mr. Raymond. Mr. Munshi on behalf of Sassoons has referred us to a good many cases which undoubtedly show that where you have a director common to two companies you cannot impute to both those companies all matters within the private knowledge of the director, The cases referred to are In re Marseilles Extension Railway Co., Exparte Credit Fonder and Mobilier of England ; In re Hampshire Land Co. and Duck v. Tower Galvanizing Co. I may take the general rule as stated in In re Hampshire Land Co. There the headnote, which I think accurately represents the decision says: "Where one person is an officer of two companies his personal knowledge is not necessarily the knowledge of both the companies. The knowledge which he has acquired as officer of one company will not be imputed to the other company unless he has some duty imposed on him to communicate his knowledge to the company sought to be affected by the notice, and some duty imposed on him by that company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore share-holders of M.T.s, and in that way had an interest conflicting with that of the company, and that their votes therefore could not be counted under Section 91-B. It seems to me, in the circumstances of this case, impossible to hold otherwise than that Sassoons had notice that the votes of the directors of Pratts in favour of the execution of this document, under which they claim, ought not to have been counted by reason of the provisions of Section 91-B. If that is so, the resolution of the directors of Pratts of February 23, 1928 is void, and the execution of the mortgage in favour of Sassoons must also be void: see In re Greymouth Point Elizabeth Railway and Coal Co., Ltd. It was further argued by Mr. Munshi that even if the document was void, it had been ratified by all the shareholders of Pratts. So far as the holders of ordinary shares were concerned, there may have been a ratification, because all the ordinary shares were held either by M.T.s or by their directors, but the preference shares were held by outside parties, one of whom was Mr. F.E. Dinshaw, who alone is suggested to have had notice. It is said that Mr. F.E. Dinshaw was informed that Pratts had mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d inira vires, and moneys borrowed ultra vires in respect of which the relationship of debtor and creditor never arises. It is clear also that Pratts had the benefit of all these moneys, and as soon as the amount due came to below five lacs, the borrowing was authorized under Article 73.1 entirely agree with the learned Judge that, insofar as it is necessary to rely on any presumption, the presumption would be that the moneys repaid represented in the first place moneys borrowed ultra vires, which never became the property of the company, but remained the property of the lenders. I am not sure that in this case it is necessary to rely on any presumption, because at the material date, namely the commencement of the liquidation, Article 73 had no application, because the debt was under the limit. I agree also with the argument of Mr. Setalvad on behalf of M.T.s that in a case where the borrowing is ultra vires the directors, and not ultra vires the company, the money could be recovered in an action for money had and received. As pointed out by the Lord Chancellor in Sinclair v. Brougham where the borrowing was ultra vires the company, no action for money had and received lies in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract in suit. That being so, the appeal against Sassoons will be allowed, and the appeal against M.T.s dismissed. Declared that M.T. s are entitled to a certificate under Rule 702, as unsecured creditors for the amount of their claim. The appeal against M.T. s is dismissed with costs, and the liquidator of Pratts will have liberty to pay the costs out of the assets. The appeal is allowed against Sassoons ; but having regard to the fact that they have succeeded on certain issues in the lower Court and in this Court, they ought not to pay the whole of the costs in both the Courts. Instead of apportioning costs, we propose not to vary the order of the lower Court that the costs of respondent No. 1 should come out of the assets, but we direct respondent No. 1 to pay the whole costs of the appeal against respondent No. 1 to the appellant. B.J. Wadia, J.-I have come to the same conclusion. The question for decision so far as the claim of the Sassoons is concerned, centers round the transaction contained in the deed on mortgage, dated February 28, 1928, made between M.T.s. the Pratts and the Sassoons. The claim of the Sassoons is based on this deed, and on the deed of 1931 between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated in them, but they are not false in substance. To hold otherwise would be, in my opinion, to sacrifice substance to form. There is also a plain recital that Pratts required four and a half lacs for the purpose of their business, that these four and a half lacs were advanced for such purpose, and there is no evidence before us that the money which were within the authorized limit were not used and applied bona fide for the purposes of the company. When moneys borrowed or acknowledged to be due are within the authorized limit, there is no obligation upon the lending company to inquire how the moneys are about to be used nor how in fact they have been used. In my opinion, therefore, all the parties would be bound by this transaction, if it was otherwise valid. I agree with the learned Judge in the Court below that this is not a suretyship transaction. The fact of Pratts having been described as "surety" is not conclusive as to the nature of the transaction, any more than the stamp on the document is conclusive as to what the document really is. Our attention was drawn to certain correspondence that passed before the deed was executed. But all previous correspondence was in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angement with the company; he cannot vote on that contractor arrangement; and the proviso to Article 77 in Table A says in effect the same thing, except that the words in the section are "contract or arrangement" and the words in the article are 'contract or work.' It is clear that the interest of the director in the transaction must be personal, and either pecuniary or material. It may be direct or indirect, but it must be adverse to the company of which he is a director. The principle on which it is based has' been well recognized, and it is so direct and inflexible that even the fairness or unfairness of the transaction is immaterial. For instance, directors have been held to be incopmetent to vote on giving a debenture security to two of themselves in consideration! of a large sum of money owing to them : In re Greymouth Point Elizabeth Railway and Coal Co., Ltd. They cannot vote on an issue of debenture to secure an overdraft account with the bank which was guaranteed by themselves personally : Victors, Ltd. v. Linggard. A director cannot vote on an allotment of shares to himself: In Re Hormusji A. Wadia. The reason in all these cases is that the company is entitled to the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operly called, the question whether there was a proper and competent quorum qualified to vote on the resolution, are all matters of internal or in door management of the company, and do not affect the validity of the contract or transaction so far as outsiders are concerned, under the ruling in Royal British Bank v. Tarquand and a company is bound by its own resolution. A person dealing with limited liability companies is deemed to have notice of its memorandum and articles of association, but he is not bound to inquire into the internal management, and will not be affected by any irregularity of which he has had no notice. He has a right to assume that nothing has been done or permitted to be done which is not permitted by the memorandum and articles of association or by the statute incorporating the company itself. But actual or constructive notice of any irregularity prevents a third person contracting with the company from obtaining the protection of the rule in Royal British Bank v. Tarquand namely, that all matters of internal or in-door management must be deemed by outsiders to have been duly and properly complied with. Such notice, as I have said, may be actual or construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough he may not have appreciated the legal significance of that fact nor thought it his duty to communicate to the Sassoons. There were other circumstances surrounding the transaction which were sufficient to suggest further inquiry. The two resolutions passed on the same day are mentioned under the seals of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in the Court below has stated that if this transaction could have been put through by two documents, it might as well have been put through by one, and there was nothing unusual in its nature as a business transaction. The form may not be unusual, but the question is not one merely of form. A transaction which may be effected by two documents may well be effected by one, but the doubt as to the validity of the transaction as embodied either in one document or two documents will still remain under the circumstances which I have referred to before. In my opinion it was Mr. Raymond's duty as manager of Sassoons for all business purposes to act not merely for the purposes of receiving information but also for the purpose of communicating it. It is really difficult to believe that there was a situation on Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his brings me to the claim of M.T.s which is really an alternative claim. It is stated in para. 7 of the affidavit of Mr. J.M. Taleyarkhan, dated July 7, 1933, that in the event of the claim of Messrs. E.D. Sassoon & Co., Ltd., being admitted, M.T.s will not claim the amount over again. Article 73 of Table A has already been referred to and I need not recite it again. It fixes the directors' limit of borrowing at five lacs. It was, however, argued that borrowings by Pratts were far in excess of the limit of five lacs, but in my opinion there is no ground for assuming that the claim now made, which is below the limit, represents the balance of unauthorized borrowings. It was further argued that the Pratts should not, in any event, be charged with interest on that portion of the claim, which may represent interest on their unauthorized borrowings. That contention, however, was never put forward in the Court below. It has not been mentioned in the judgment. It is not taken in the memorandum of appeal. Even in the affidavit of the liquidator himself of July 13, all that is stated is as follows : "The petitioners contend, and I am advised with reason, that as the payments made by the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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